Question

Choose two companies in the same industry whose financial statements are available online. Complete several financial ratios for each company and compare them. What did your analysis tell you about these companies? What sorts of decisions would this analysis help you make; such as buying stocks, considering accepting an employment offer, etc.?

Answer 1

The two companies whose financial statements are available online are Microsoft and Apple Inc. Both these companies operate in the same industry of IT, IT enabled services and hardware

The financial ratios for the two companies using their latest annual reports are:

Ratio	Microsoft	Apple
Liquidity ratios
Current ratio = current assets/current liabilities	2.90	1.12
Quick ratio = (current assets - inventories)/current liabilities	2.86	1.09
Profitability ratios
Gross margin %	65	38
Operating margin %	32	27
Net income margin %	15	22
ROE %	20	56
Leverage ratios
Debt-equity ratio	212.93%	241.33%
Debt-total asset ratio	68.04%	70.70%

From the above table of financial ratios I can say that Microsoft is in a better financial health as a company than Apple. This is because Microsoft’s liquidity ratios are much better than Apple’s. Microsoft’s current ratio is 4.47 compared to Apple’s 1.12 (almost 4 times) and this indicates that Microsoft’s ability to meet its short term liabilities is far greater than that of Apple. A look at profitability ratios also shows us that Microsoft is more profitable than Apple at the gross level and the operating level. In terms of risk of default Apple has a greater risk due to its high debt component. Apple’s debt to equity ratio is 241.33% and this means that debt at Apple is around 2.4 times the amount of its equity. The ratio for Microsoft is lower at 212.93%.

Using the above numbers I can do analysis with regards to credit worthiness of the companies, accepting an employment offer and being a vendor for the company. The company’s liquidity and leverage ratios indicate that Microsoft is in a better position to meet its liabilities and debt obligations. Hence if I were a lender or if I were looking to buy debt instruments of the two companies I will avoid Apple due to its high financial leverage. If I were a vendor I would be more comfortable supplying to Microsoft due to its better liquidity ratios. Lastly if I was looking at employment opportunities then I will select Microsoft over Apple simply because of the fact that profit margins are better at Microsoft, the company is better managing its debt and short term obligations and hence the management is more focused and more driven to ensure good financial health for the company. As an employee my long term prospects will be better at Microsoft.